I have transferred over the numbers from some of the slides into a spreadsheet, and I’m trying out multiple scenarios. For this post, I’m doing extremely simplistic scenarios … and I feel that’s fair, as the presentation included only very simplistic scenarios.

By any measure, the growth in pension benefits accumulated by government workers and retirees in Illinois has been overwhelming. It’s been the cause of Illinois’ pension crisis.

A lack of money has not been the cause of the pension crisis. Illinois’ pension assets have grown at a rapid pace, far outstripping the growth of other Illinois economic indicators and pension assets in other states.

Fast-growing pension assets simply haven’t been able to keep up with the pace of benefit growth in Illinois. With a lower rate of benefit growth, Illinois would not have a pension crisis.

Read the whole thing. But to whet your appetite, here is a key graph:

The promises being made have far outstripped the actual growth of money shoved in to fulfill those promises.

That’s the 5-year average for the peers against which Illinois pensions are compared, as of fiscal year 2015.

Notice that the Illinois funds do worse against that comparison, and the 10-year average is lower than the 7.6%, though it’s on a par with its peers. That said, the 7.6% vs 7.62% amount may just be chance matching of numbers.

The next isn’t.

That “adverse scenario” in the presentation is this: the actual pension fund returns for fiscal years 2008-2012… and then just held at a level 7% thereafter.

The assumption are that the bonds are issued with a 5.5% coupon, and that the pension liability cash flows are as they were in the presentation (THAT’S A HUGEASSUMPTION). The only thing that gets changed are the asset allocation and the historical return pattern.

I will use an allocation of 60% equity, 40% bond for the following, as it’s a generic allocation for pensions that used to be widespread. I’m using historical returns so the higher bond returns of the past will lead to those higher allocation.

I will be nice and put in a happy scenario to begin with. Let’s say we started in 1980.

Ooooh Aaaah.

Okay, now I’m going to be mean. Let’s start in 1929.

Now that’s an adverse scenario.

I may try out other scenarios later, but I thought to keep it simple for now. Because it’s not necessarily the investment return outcomes that provide the most risk in this situation…. and I will talk about that another time.

Anyway, play with it yourself. If you’re an Illinois politician considering this proposal and would like an explanation of how this tool works, by all means, email me at marypat.campbell@gmail.com. I’m very happy to explain what I did.

A REMINDER

This is not going to work.

Illinois can’t afford the pension promises it has made. A bond won’t change that through magic.

As Wirepoints has pointed out, using official measures (which do not really overvalue the liabilities), the pensions have grown well beyond reasonable bounds.

EVERYBODY will get screwed. That includes pension participants.

A POB, by adding more leverage to the system, would only make the disaster worse.